Mortgage Pfandbriefe

This chapter describes the German mortgage-bonds or Pfandbriefe market, its institutions, and working practice. We also consider other aspects of the European covered bond market. The instruments themselves are essentially plain vanilla bonds, and while they can be analysed in similar ways to US agency bonds and mortgage-backed bonds, there are also key differences between them, which we highlight in this chapter. Mortgage-backed securities are described in Chapter 11. 

In the event of a mortgage bank becoming insolvent, the Pfandbriefe creditor would receive a preferential claim over the assets in the respective cover pool, which is there solely to protect them. They would not be required to participate in the insolvency procedures, but instead have any claim satisfied on schedule in accordance with the terms of the respective issue out of the cover assets. However, if the claim cannot be satisfied on time, in respect of coupon payments and redemptions because the cover pool is insolvent, separate proceedings will then commence in regard to the pool affected. 

Traditional Pfandbriefe may be issued in either bearer or registered form, whereas Jumbos are only issuable as bearer bonds. For several years now, there has been a considerable shift in favour of the bearer paper, an indication of the growing share of Jumbo issues brought by the mortgages banks and their willingness to provide fungible bonds to their investors. Today, approximately 75% of all Pfandbriefe are bearer instruments. 

Aside from the traditional and Jumbo Pfandbriefe, the mortgage banks also offer structured Pfandbriefe for those investors that seek a more individually tailored product to suit their portfolios. These products are structured to particularly suit the investors interest rate expectations and their desired risk/return profiles. Structured Pfandbriefe allow the mortgage banks to combine the asset quality of the Pfandbrief with the advantages offered by derivatives. 

On 1 Jnly 2002, the amendments to the German Mortgage Bank Act finally came into force. The main ambition of these changes was to allow the Pfandbrief market to compete on a more level playing field with their np and coming foreign rivals. 

Collateral cover is now calculated with reference to market value as well as nominal value, enabling greater transparency and precision in the calculation of cover. Both these amendments benefit the Pfandbrief investor in the event of the insolvency of a mortgage bank, there would be no netting of derivatives, which would therefore continue to protect the cover pools and allow the banks to hedge against adverse market conditions that could cause their paper to suffer credit deterioration. 

This distinction between the two translated, until recently, into very little in practice. However, as the mortgage banks, in common with all German banks in the latter half of 2002, experienced significant credit deterioration these different approaches have become far more apparent. Pfandbrief paper from the same issuer is now rated differently by the two main rating agencies for example, Moody s now rates AHBR s mortgage-backed bonds A1 whereas S P still maintains a triple-A outlook. 

France had seen Germany s mortgage banks, with the success of the Pfandbrief market, being able to raise refinancing facilities at considerably lower costs than their French counterparts. They wanted quickly to follow suit. The French banks realised that failing to do so could result in their domestic market share being eroded by aggressive competition from across the border. 

New and sophisticated covered bond laws, offering significant improvements to the original Pfandbrief model, have been introduced in France, Spain, Luxembourg, and now Ireland. Germany has responded with its amendments to the Mortgage Bank Act. 

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